UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 10. EMERGING ECONOMIES AND GLOBAL GROWTH.

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UCL ECON1005. THE WORLD ECONOMY. Hugh
Goodacre.10. EMERGING ECONOMIESAND GLOBAL
GROWTH. Definitions Developed /
developing. Industrialised / pre-industrial,
etc. Emerging markets. Emerging
economies. Globalisation. New stage in impact of
emecs on the global economy. emec output half
global total (PPP) in 2005. Wide and increasing
gap in growth rates between emecs and omks.
Increased integration of emecs into global
economy. Growth and its engine historical
perspective. Globalisation pain and gain.
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Part 3 overview EMERGING ECONOMIES AND THEIR
IMPACT ON THE WORLD ECONOMY. General theme emecs
now impact on all major macro issues globally,
including in omks
emecs and the four major macroeconomic issues emecs and the four major macroeconomic issues
Growth New stage in impact of emecs on global macroeconomy.
Unemployment emecs and the global labour market.
Inflation emecs and global inflation rates.
International balances Emecs, interest rates, credit, and global imbalances.

Growth New stage in impact of emecs on global macroeconomy.
Unemployment emecs and the global labour market.
Inflation emecs and global inflation rates.
International balances Emecs, interest rates, credit, and global imbalances.


Unemployment emecs and the global labour market.
Inflation emecs and global inflation rates.
International balances Emecs, interest rates, credit, and global imbalances.



Inflation emecs and global inflation rates.
International balances Emecs, interest rates, credit, and global imbalances.




International balances Emecs, interest rates, credit, and global imbalances.
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Two traditions in macroeconomics
Classical approach
All kinds of prices (P, r, ER, W) adjust for optimal outcome
Supply creates its own demand
Trying to stimulate demand (e.g. through monetary expansion) only results in inflation

(i) Market-clearing
(ii) Says law
(iii) Quantity Theory of Money
Keynesian critique
Adjustments may fail P, W, etc., may be sticky / rigid
Unregulated markets may fail to provide sufficient demand
Monetary policy, etc., can affect real economy, not just prices
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I i.e. Keynes have called this book the General
Theory of Employment, Interest and Money, placing
the emphasis on the prefix general. The object of
such a title is to contrast the character of my
arguments and conclusions with those of the
classical theory of the subject I shall argue
that the postulates of the classical theory are
applicable to a special case only and not to the
general case From GT, Chapter 1. But if our
central controls succeed in establishing an
aggregate volume of output corresponding to full
employment as nearly as is practicable, the
classical theory comes into its own again from
this point onwards. From GT, Chapter 24..
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Keynes and classical economics
P
P1
AD1
YFE
YR
Y
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UK unemployment and inflation inverse
relationship, 1919 - 38
Unemployment
Inflation
Unemployment of workforce
Inflation
Unemployment and inflation go in opposite
directions during this period.
They show an inverse relationship
Negative inflation is termed deflation
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The Phillips Curve
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Stagflation Breakdown of the stable Phillips
Curve.
From late 1960s, negative relationship between u
and p no longer evident
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• Apparent paradox
• Low inflation despite robust growth and
  increasing energy prices.
• omk inflation now rising, though still low by LR
  historical standards

US 3.5
UK 2.1
Eurozone 2.6
Germany 3.9
China 6.5
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Course overview and themes III. EMERGING
ECONOMIES AND THEIR GLOBAL IMPACT. General theme
Emerging economies (emecs) in NICE period and
after Affect all major macro issues globally,
including in older market economies (omks)
effects in recent (NICE) period
Growth High growth rates of emecs Reconfiguration of global economy.
Un/employment Development of a global labour market Flat wages in omks despite increasing productivity.
Inflation Emerging economies dampen omk inflation Low inflation despite robust growth and increasing energy prices.
Global im-/balances Interest rates, credit, and global imbalances Low interest rates / abundant credit despite high output and growth.
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Definitional issues (1) Developed /
developing / development economics Colonial
era Referred to developing natural resources of
colonies. From end of 1930s Rise of
development economics / broader
perspective. Post-1945 Newly-independent former
colonies Developing replaced backward,
etc. 1960s WB took on poverty agenda.
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Developed / developing / development
economics, contd. WC / IMF Implies denial of
specificity of development economics. PWC Note
base in WB gt IMF. Called for restoring specific /
different criteria for development issues. e.g.
Pressure for Development Round not advanced in
traditional terms (classical TCA, etc.).
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Definitional issues (2) Industrialised /
pre-industrial, etc. Note expanding membership
of OECD Originally (1948) 20. Now
30. Boundaries increasingly blurred?
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Definitional issues (3) Emerging markets The
term reflects end of Soviet Union / socialist
period in Eastern Europe. But note The
emergence has not moved in step with market
liberalisation Particularly in East
Asia Protection central to rapid growth.
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Definitional issues (4) Emerging
economies India and China were worlds biggest
economies till late 19th century. Re-emerging
more appropriate?
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Definitional issues (5) Globalisation. Removal
of barriers to cross-border production cross-bord
er trade cross-border investment. Commonly led
by MNCs The IFIs. Outcome for worlds
economies Increase in Integration Interdependen
ce
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Increased integration of emecs into global
economy. Increasingly integrated into global
system of production. Trade and capital flows
accelerating relative to GDP. Spread of ICT ?
increased cross-border production. Activities
previously non-tradable / services increasingly
offshored to emecs. Preview Blinders Third
Industrial revolution. China joined WTO in
2001 very open economy very rapid increase
in proportion of world trade 2000
4 2006 10 ? now
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New stage in impact of emecs on the global
economy Scale emecs as age of worlds total
(2006)
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• EMECS AND GLOBAL GROWTH
• Output reached half global total (PPP) in 2005
• Emec GDP as age of worlds total

But note Purchasing Power Parity (PPP)
measure. Takes account of lower prices (services,
etc.) in poorer countries. Still lt 30 at market
exchange rates.
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Growth rates in emecs and omks Average annual
growth rate since 2000 omks 2.3
emecs 6.9 i.e. ge 3.go
Gap wide and increasing.
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• Growth and its global engine
• Traditional assumption US is engine of gW.
• BUT 2005, as seen
• Ye gt 0.5.Yo (PPP)
• also ge 3.go
• Delinkage from the US?

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• Growth and its global engine, contd
• Unprecedented annual rate of growth of world GDP
  per capita.
• Long-run historical perspective

Industrial revolution to WW1 1870-1913 1.3
Post-war (post-WW2) boom 1945-1973 2.9
Current period 2000- 3.2
i.e. emecs ? greatest boost to world growth in
history.
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Gain Boost to global D gains for omks From
DXO? from emecs. New markets Increase in emec
incomes passing threshold ? can purchase
non-essential items / imports. 300m in China now
have income at US level. outcome for omk
exports gt 0.5XO are to emecs. Growth in omks
exports to emecs is twice growth in inter-omk
exports.
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Gain Boost to global S Preview Labour
supply China, India, former Soviet bloc ? global
labour market twice the size / massive
?LW. Positive S shock.
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Boost to global growth ge adding to gW not
substituting for go. Also Productivity
? Increase in education. Technological
catch-up. Economies of scale through vast global
operations of MNCs. Efficiency through
competition. Very timely when omk workforces are
aging / go slowing.
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Pain omks Threat to jobs in manufacturing and
standardisable services. Preview Global ?L ?
shift in K/L ratio ? shift in W/p share ?
increased inequality in omks. Increasingly
affects middle-earners as well as
unskilled. Basis for political opposition Majorit
y experience globalisation as negative ?
potential pressure for protection. Stiglitz
Could stop globalisation working. Title of his
2006 book Making globalisation work.
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Pain emecs Massive adjustment issues e.g. in
China Loss of former manufacturing jobs in state
sector Regional imbalances. Migration from
countryside to towns. Continuing poverty / highly
uneven distribution of income and
wealth Inequality within emecs. e.g. China 2001
survey (WB)
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Pain emecs Inequality between emecs. e.g. per
capita income (PPP) in Singapore, Hong Kong
gt 20,000 South Korea gt 12,000 Latvia lt
5,000 Poorest countries lt 2,000
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Balance of gain and pain for omks
summary. Gain Boost to global D. Boost to
global S. Boost to global growth. Productivity ?,
economies of scale. Pain omks Threat to jobs.
Shift in W/p share. Basis for political
opposition. emecs Massive adjustment issues
Regional imbalances. Internal migration. Continui
ng poverty
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Preview of rest of Part 3 Global labour
market ge affects real Wo / bargaining power /
threat of offshoring. Also not just manual
increasingly services as well. Inflation Cheap
manufactures from emecs a major contribution to
keeping global inflation low, despite robust
growth. Global imbalances NICE era CBs keep
global interest rates low ? asset boom. Fuelled
by cheap credit in US due to massive foreign
exchange surplus of China, oil-exporters, etc.
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Introduction Perpectives on the world
economy. PART I. ECONOMIC GROWTH Growth
accounting Growth, convergence, steady
state Endogenous growth theory Divergence,
globalisation and location PART II.
INTERNATIONAL TRADE Classical trade theory Free
trade and protection Post-war Keynesianism. Washin
gton Consensus and its critics. PART III.
EMERGING ECONOMIES AND GLOBAL IMBALANCES Emerging
economies and global growth The global labour
market Global inflation rates Global
imbalances. Summary and conclusions Practice
Current issues in international trade and finance
negotiations. Theory Post Washington Consensus
and beyond?